From 1 October 2008 directors will have a duty to avoid a situation in which they have, or may have, a conflict of interest with those of the company. This requirement is very broad and such a situation could arise where a director is a major shareholder in the company; where a director owes duties to different entities within a group; or has cross directorships with a supplier or customer of the company.
In a significant change to existing law this duty will not be breached if the matter has been authorised by other independent directors in accordance with the articles of association (articles). Companies should therefore change their articles before 1 October 2008 to enable independent directors to authorise other directors' conflicts of interests to avoid them being in breach of the new legislation.
What are the rules?
Private companies incorporated before 1 October 2008
Authorisation can be given by such disinterested directors if:
- members of the company pass an ordinary resolution to permit the directors to authorise conflicts; or
- members of the company pass a special resolution to change the articles to include a provision allowing the directors to authorise any actual or potential conflict.
Private companies incorporated after 1 October 2008
Authorisation can be given by the board provided that nothing in the company's articles invalidates such authorisation.
Authorisation can only be given when its articles include a provision allowing the directors to authorise the matter.
What should companies do?
- Private companies (incorporated before 1 October 2008) should update their articles to allow the directors to authorise any actual or potential conflicts.
- Private companies (incorporated after 1 October 2008) should check their articles to ensure that nothing invalidates the ability of the board to authorise conflicts of interests.
- Public companies should update their articles to include a provision to allow the directors to authorise actual or potential conflicts.
- Private and public companies should update their articles to:
contain provisions dealing with the use of confidential information received other than as a director of the company, provisions allowing the director to be absent from meetings and
- provisions allowing the availability of board papers to protect a director being in breach of duty if an actual or potential conflict arises; or
- contain provisions allowing the independent directors to impose certain conditions to any authority granted, i.e. relating to the management of confidential information.
- Ensure that governance safeguards are put in place to help directors decide whether to authorise a conflict of interest.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.